Our outlook is for mid-single digit growth for FY18 and we maintain our HOLD rating and SGD4.90 target based on +1sd over 5y forward PE mean (due to our expected ROE expansion of another 150-200bps over the 3-5 years).

Japan the main area of underperformance in 1Q18

On segmental revenues, gateway services performed well with a +5.1% YoY growth mirroring the positive traffic trends being witnessed at Changi Airport. Food solutions however declined -2.9% due to two factors – a non-aviation customer contract being restructured but more importantly, TFK Japan posting an -11% revenue decline from customers Delta Airlines and Japan Airlines cutting flight frequency.

Management state that they are working on a pipeline of new customers for TFK.

Managing cost pressures

an increase in franchise fees to Changi Airport Group from 1-Apr-2017 and

some front-loaded operating costs for Changi Terminal 4 (to open later this year).

These cost pressures were mitigated with lower raw material costs from leveraging its scale with suppliers and productivity improvements through automation which management state they will continue to invest in for the next few years.

Associate contribution ramp-up the wild card

Associates delivered a solid +27% YoY growth which management state was quite broad based with India and Indonesia markets doing particularly well. Given the number of new ventures in nascent operations or in gestation, we believe this is the wild card for earnings surprises or disappointments in FY18E-FY20E.

Risks

Upside risks:

The key upside risk factors to our rating and valuation are a positive change to the current competitive environment and an improvement in fundamentals for the airline industry that could improve pricing dynamics for the aviation services industry, transformational inorganic growth from acquisitions and higher dividend payout (currently capped at around 80% levels despite large cash hoard)

Downside risks:

The key downside risk factors lie in a deterioration in the airline industry fundaments and in execution risk with the various new ventures/investments.

While the progress is encouraging in some of these ventures, payback periods are long for most and poor execution that results in a drag to profits from the core legacy business would be a negative.

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